logo-loader

Capital Drilling shares rise on upbeat outlook

Published: 07:49 17 Aug 2016 EDT

a drill rig
Capital expects the improving gold price will lead to more drilling contracts

Capital Drilling Ltd (LON:CAPD) shares advanced 13% after it provided a guardedly optimistic assessment of prospects and hiked its interim dividend payment by more than a third.

Reporting on a solid six months in which revenues grew 5% and underlying earnings (EBITDA) were stable, the company said it had detected “positive signs of improvement, resulting in increased tendering”.

It said the strengthening of the gold price and the increased interest in the resources sector, particularly from potential funders of projects, were stimulating activity.

The direct drivers for the company were long-term production and grade control contracts in Egypt and Tanzania have continued to “diversify and underpin performance”, Capital added.

In the six months ended June 30 turnover grew to US$41.7mln from US$39.7mln a year earlier, while EBITDA fell US$600,000 to US$7.3mln.

 

Strong balance sheet, divi up

“The highlight for the company has for the last few years been the outstanding cash generation and we’ve now had seven consecutive halves of position cash from operations and positive free cash flow,” said chairman Jamie Boyton.

VIDEO: Capital Drilling chair hails "exceptionally strong" cash flow in 2015

Capital Drilling generated US$7.7mln of cash in the first six months of 2016.  This provided the funds that will boost the dividend 36% to 1.5 cents share.

On an annualised basis this adds up to 4 cents a share, or an 8% trailing dividend yield, which Boyton described as “quite outstanding in this industry”.

The company’s broker, finnCap expects the dividend to continue to grow over the next few years and has raised its estimates by 10% for 2016 and 2017 to 4.2p and 4.4p respectively.

finnCap had more good news for investors, insisting that Capital is well-position to support “above average increases” in dividends over the coming years.

 

Analysts forecast a strong 2017

“The interim results were encouraging, confirming the upbeat outlook and raised revenue guidance though with additional up-front costs and higher interest charge in the current year we have maintained our 2016 profit forecast,” said finnCap’s David Buxton in a note.

For 2017 he has upgraded his revenue estimate by 4.5%, resulting in an 18% increase in earnings per share to 0.8 cents.

With that in mind, the broker now expects Capital to generate an adjusted profit before tax of US$2.5mln this year, and US$4mln next.

The mining industry has struggled over recent years, but finnCap says the group “is now well-positioned, both financially and operationally, to gain from any improvement in underlying market conditions over the next few years”.

Despite a strong 2016 when the share price has almost doubled, Buxton still sees more headroom for price growth, setting a target of 50p.

 

The future’s bright, the future’s gold

Gold prices have skyrocketed in 2016, making it one of the best performing assets in the year to date and many traders think the precious metal will continue to rise into 2017.

Credit Suisse recently published a note where it took a bullish stance on gold, forecasting it to hit US$1,475 before the year is out as investment demand grows from increasing macro uncertainties.

The Swiss banking giant also suggested that supply from gold miners could slow, while negative interest rates around the world will also likely support higher prices.

finnCap believes Capital Drilling can take advantage of this surge given that the “group’s main exposure is to gold” and expects it to win more exploration contracts for the metal in the coming months, something which it would seem this is already starting to materialise.

“The exciting thing is that we’ve won a number of contracts which means that our second half revenue is forecast currently to grow at a rate of 12% on the first half, so a return to double-digit growth,” said Boyton.

“Obviously the driver of that has been the inflexion point reached in metal prices, particularly gold which is our main exposure.”

 

And there’s more to come, too

In the first half of 2016, none of Capital’s rig fleets were used to full capacity. Only its 21-strong fleet of blast-hole rigs came near full utilisation (94%), while diamond rigs were only at 10% of capacity.

Rather than view this as a negative, Capital, as well as analysts, believe this bodes well for the company and shows the growth potential on offer.

“We still have a lot of available to rigs to put to work as we win more tenders…which shows that we still have significant capacity to grow.”

 

And finally the share price…

Shares were up 5.3p, or 14%, to 44.3p, valuing the company at just shy of £60mln.

Capital is on something of a charge in 2016, gaining more than 90% in the year to date.

BenevolentAI advances novel ulcerative colitis treatment through Phase 1a trial

BenevolentAI (OTC:BAIVF) chief scientific officer Dr Anne Phelan joins Proactive's Stephen Gunnion with positive safety data from the Phase 1a, first-in-human, clinical study of BEN-8744 in healthy volunteers. Phelan explained that BEN-8744 is a potent, selective PD10 inhibitor, uniquely...

1 hour, 46 minutes ago